Book III, Chapter IX

Of the Commercial System.

III.IX.1

A country which excels in commerce and manufactures, may purchase corn from a great variety of others; and it may be supposed, perhaps, that, proceeding upon this system, it may continue to purchase an increasing quantity, and to maintain a rapidly increasing population, till the lands of all the nations with which it trades are fully cultivated. As this is an event necessarily at a great distance, it may appear that the population of such a country will not be checked from the difficulty of procuring subsistence till after the lapse of a great number of ages.

III.IX.2

There are, however, causes constantly in operation, which will occasion the pressure of this difficulty, long before the event here contemplated has taken place, and while the means of raising food in the surrounding countries may still be comparatively abundant.

III.IX.3

In the first place, advantages which depend exclusively upon capital and skill, and the present possession of particular channels of commerce, cannot in their nature be permanent. We know how difficult it is to confine improvements in machinery to a single spot; we know that it is the constant object, both of individuals and countries, to increase their capital; and we know, from the past history of commercial states, that the channels of trade are not unfrequently taking a different direction. It is unreasonable therefore to expect that any one country, merely by the force of skill and capital, should remain in possession of markets uninterrupted by foreign competition. But, when a powerful foreign competition takes place, the exportable commodities of the country in question must soon fall to prices which will essentially reduce profits; and the fall of profits will diminish both the power and the will to save. Under these circumstances the accumulation of capital will be slow, and the demand for labour proportionably slow, till it comes nearly to a stand; while, perhaps, the new competitors either by raising their own raw materials or by some other advantages, may still be increasing their capitals and population with some degree of rapidity.

III.IX.4

But, secondly, even if it were possible for a considerable time to exclude any formidable foreign competition, it is found that domestic competition produces almost unavoidably the same effects. If a machine be invented in a particular country, by the aid of which one man can do the work of ten, the possessors of it will of course at first make very unusual profits; but, as soon as the invention is generally known, so much capital and industry will be brought into this new and profitable employment, as to make its products greatly exceed both the foreign and domestic demand at the old prices. These prices, therefore, will continue to fall, till the stock and labour employed in this direction cease to yield unusual profits. In this case it is evident that, though in an early period of such a manufacture, the product of the industry of one man for a day might have been exchanged for such a portion of food as would support forty or fifty persons; yet, at a subsequent period, the product of the same industry might not purchase the support of ten.

III.IX.5

In the cotton trade of this country, which has extended itself so wonderfully during the last twenty-five years, very little effect has hitherto been produced by foreign competition.*30 The very great fall which has taken place in the prices of cotton goods has been almost exclusively owing to domestic competition; and this competition has so glutted both the home and foreign markets, that the present capitals employed in the trade, notwithstanding the very peculiar advantages which they possess from the saving of labour, have ceased to possess any advantage whatever in the general rate of their profits. Although, by means of the admirable machinery used in the spinning of cotton, one boy or girl can now do as much as many grown persons could do formerly; yet neither the wages of the labourer, nor the profits of his master, are higher than in those employments where no machinery is used, and no saving of labour accomplished.

III.IX.6

The country has, however, in the mean time, been very greatly benefited. Not only have all its inhabitants been enabled to obtain a superior fabric for clothing, at a less expense of labour and property, which must be considered as a great and permanent advantage; but the high temporary profits of the trade have occasioned a great accumulation of capital, and consequently a great demand for labour; while the extending markets abroad and the new values thrown into the market at home, have created such a demand for the products of every species of industry, agricultural and colonial, as well as commercial and manufacturing, as to prevent a fall of profits.

III.IX.7

This country, from the extent of its lands, and its rich colonial possessions, has a large arena for the employment of an increasing capital; and the general rate of its profits are not, as it appears, very easily and rapidly reduced by accumulation. But a country, such as we are considering, engaged principally in manufactures, and unable to direct its industry to the same variety of pursuits, would sooner find its rate of profits diminished by an increase of capital, and no ingenuity in machinery which was not continually progressive could save it, after a certain period, from low profits and low wages, and their natural consequences, a check to population.

III.IX.8

Thirdly. A country which is obliged to purchase both the raw materials of its manufactures and the means of subsistence for its population from foreign countries, is almost entirely dependent for the increase of its wealth and population on the increasing wealth and demands of the countries with which it trades.

III.IX.9

It has been sometimes said, that a manufacturing country is no more dependent upon the country which supplies it with food and raw materials, than the agricultural country is on that which manufactures for it; but this is really an abuse of terms. A country with great resources in land may find it decidedly for its advantage to employ the main part of its capital in cultivation, and to import its manufactures. In so doing, it will often employ the whole of its industry most productively, and most rapidly increase its stock. But, if the slackness of its neighbours in manufacturing, or any other cause, should either considerably check or altogether prevent the importation of manufactures, a country with food and raw materials provided at home cannot be, long at a loss. For a time it would not certainly be so well supplied; but manufacturers and artizans would soon be found, and would soon acquire tolerable skill;*31 and though the capital and population of the country might not, under the new circumstances in which it was placed, increase so rapidly as before, it would still have the power of increasing in both to a great extent.

III.IX.10

On the other hand, if food and raw materials were denied to a nation merely manufacturing, it is obvious that it could not longer exist. But not only does the absolute existence of such a nation, on an extreme supposition, depend upon its foreign commerce, but its progress in wealth must be almost entirely measured by the progress and demand of the countries which deal with it. However skilful, industrious and saving such a nation might be, if its customers, from indolence and want of accumulation, would not or could not take off a yearly increasing value of its commodities, the effects of its skill and machinery would be but of very short duration.

III.IX.11

That the cheapness of manufactured commodities, occasioned by skill and machinery in one country, is calculated to encourage an increase of raw produce in others, no person can doubt; but we know at the same time that high profits may continue for a considerable period in an indolent and ill-governed state, without producing an increase of wealth; yet, unless such an increase of wealth and demand were produced in the surrounding countries, the increasing ingenuity and exertions of the manufacturing and commercial state would be lost in continually falling prices. It would not only be obliged, as its skill and capital increased, to give a larger quantity of manufactured produce for the raw produce which it received in return; but might be unable, even with the temptation of reduced prices, to stimulate its customers to such purchases as would allow of an increasing importation of food and raw materials; and without such an increasing importation, it is quite obvious that the population must become stationary.

III.IX.12

It would come to the same thing, whether this inability to obtain an increasing quantity of food were occasioned by the advancing money price of corn, or the falling money price of manufactures. In either case the effect would be the same; and it is certain that this effect might take place in either way, from increasing competition and accumulation in the manufacturing nation, and the want of them in the agricultural, long before any essential increase of difficulty had occurred in the production of corn.

III.IX.13

Fourthly. A nation which is obliged to purchase from others nearly the whole of its raw materials, and the means of its subsistence, is not only dependent entirely upon the demands of its customers, as they may be variously affected by indolence, industry or caprice, but it is subjected to a necessary and unavoidable diminution of demand in the natural progress of these countries towards that proportion of skill and capital which they may reasonably be expected after a certain time to possess. It is generally an accidental and temporary, not a natural and permanent division of labour, which constitutes one state the manufacturer and the carrier of others. While, in these landed nations, agricultural profits continue very high, it may fully answer to them to pay others as their manufacturers and carriers; but when the profits on land fall, or the tenures on which it can be held are not such as to encourage the investment of an accumulating capital, the owner of this capital will naturally look towards commerce and manufactures for its employment; and, according to the just reasoning of Adam Smith and the Economists, finding at home both the materials of manufactures, the means of subsistence, and the power of carrying on their own trade with foreign countries, they will probably be able to conduct the business of manufacturing and carrying for themselves at a cheaper rate than if they allowed it to continue in the hands of others. As long as the agricultural nations continued to apply their increasing capital principally to the land, this increase of capital would be of the greatest possible advantage to the manufacturing and commercial nation. It would be indeed the main cause and great regulator of its progress in wealth and population. But after they had turned their attention to manufactures and commerce, their further increase of capital would be the signal of decay and destruction to the manufactures and commerce, which they had before supported. And thus, in the natural progress of national improvement, and without the competition of superior skill and capital, a purely commercial state must be undersold and driven out of the markets by those who possess the advantage of land.

III.IX.14

In the distribution of wealth during the progress of improvement, the interests of an independent state in relation to others are essentially different from those of a particular province, in relation to the kingdom to which it belongs, a point which has not been sufficiently attended to. If agricultural capital increases, and agricultural profits diminish in Sussex, the overflowing stock will go to London, Manchester, Liverpool, or some other place where it can probably be engaged in manufactures or commerce more advantageously than at home. But if Sussex were an independent kingdom, this could not take place; and the corn which is now sent to London must be withdrawn to support manufacturers and traders living within its confines. If England, therefore, had continued to be separated into the seven kingdoms of the Heptarchy, London could not possibly have been what it is; and that distribution of wealth and population which takes place at present, and which we may fairly presume is the most beneficial to the whole of the realm, would have been essentially changed, if the object had been to accumulate the greatest quantity of wealth and population in particular districts, instead of the whole island. But at all times the interest of each independent state is to accumulate the greatest quantity of wealth within its limits. Consequently, the interest of an independent state, with regard to the countries with which it trades, can rarely be the same as the interest of a province with regard to the empire to which it belongs; and the accumulation of capital which would occasion the withdrawing of the exports of corn in the one case, would leave them perfectly undisturbed in the other.

III.IX.15

If, from the operation of one or more of the causes above enumerated, the importation of corn into a manufacturing and commercial country should be essentially checked, and should either actually decrease, or be prevented from increasing, it is quite evident that its population must be checked nearly in the same proportion.

III.IX.16

Venice presents a striking instance of a commercial state, at once stopped in its progress to wealth and population by foreign competition. The discovery made by the Portuguese of a passage to India by the Cape of Good Hope completely turned the channel of the Indian trade. The high profits of the Venetians, which had been the foundation of their rapidly increasing wealth, and of their extraordinary preponderance as a naval and commercial power, were not only suddenly reduced; but the trade itself, on which these high profits had been made, was almost annihilated, and their power and wealth were shortly contracted to those more confined limits which suited their natural resources.

III.IX.17

In the middle of the 15th century, Bruges in Flanders was the great entrepôt of the trade between the north and the south of Europe. Early in the 16th century its commerce began to decline under the competition of Antwerp. Many English and foreign merchants in consequence left the declining city, to settle in that which was rapidly increasing in commerce and wealth. About the middle of the 16th century Antwerp was at the zenith of its power. It contained above a hundred thousand inhabitants, and was universally allowed to be the most illustrious mercantile city, and to carry on the most extensive and richest commerce of any in the north of Europe.

III.IX.18

The rising greatness of Amsterdam was favoured by the unfortunate siege and capture of Antwerp by the duke of Parma; and the competition of the extraordinary industry and persevering exertions of the Hollanders not only prevented Antwerp from recovering her commerce, but gave a severe blow to the foreign trade of almost all the other Hanse Towns.

III.IX.19

The subsequent decline of the trade of Amsterdam itself was caused partly by the low profits arising from home competition and abundance of capital; partly by excessive taxation, which raised the price of the necessaries of life; but more than either, perhaps, by the progress of other nations possessing greater natural advantages, and being able, even with inferior skill, industry and capital, beneficially to carry on much of that trade which had before fallen almost exclusively into the hands of the Dutch.

III.IX.20

As early as 1669 and 1670, when Sir William Temple was in Holland, the effects of abundance of capital and domestic competition were such, that most of the foreign trades were losing ones, except the Indian, and that none of them gave a profit of more than two or three per cent.*32 In such a state of things both the power and the will to save must be greatly diminished. The capital must have been either stationary or declining, or at the best very slowly progressive. In fact, Sir William Temple gives it as his opinion that the trade of Holland had for some years passed its meridian, and begun sensibly to decay.*33 Subsequently, when the progress of other nations was still more marked, it appeared from undoubted documents that most of the trades of Holland, as well as its fisheries, had decidedly fallen off, and that no branch of its commerce had retained its former vigour, except the American and African trades, and that of the Rhine and Maese, which are independent of foreign power and competition.

III.IX.21

In 1669, the whole population of Holland and West Friezeland was estimated by John de Witt at 2,400,000.*34 In 1778, the population of the seven provinces was estimated only at 2,000,000;*35 and thus, in the course of above a hundred years, the population, instead of increasing, as is usual, had greatly diminished.

III.IX.22

In all these cases of commercial states, the progress of wealth and population seems to have been checked by one or more of the causes above mentioned, which must necessarily affect more or less the power of commanding the means of subsistence.

III.IX.23

Universally it may be observed, that if, from any cause or causes whatever, the funds for the maintenance of labour in any country cease to be progressive, the effective demand for labour will also cease to be progressive; and wages will be reduced to that sum, which, under the existing prices of provisions, and the existing habits of the people, will just keep up, and no more than keep up, a stationary population. A state so circumstanced is under a moral impossibility of increasing, whatever may be the plenty of corn, or however high may be the profits of stock in other countries.*36 It may indeed at a subsequent period, and under new circumstances, begin to increase again. If by some happy invention in mechanics, the discovery of some new channel of trade, or an unusual increase of agricultural wealth and population in the surrounding countries, its exports, of whatever kind, were to become unusually in demand, it might again import an increasing quantity of corn, and might again increase its population. But as long as it is unable to make yearly additions to its imports of food, it will evidently be unable to furnish the means of support to an increasing population; and it will necessarily experience this inability, when, from the state of its commercial transactions, the funds for the maintenance of its labour become stationary, or begin to decline.

It is a curious fact, that among the causes of the decline of the Dutch trade, Sir William Temple reckons the cheapness of corn, which, he says, "has been for these dozen years, or more, general in these parts of Europe." (Vol. i. p. 69.) This cheapness, he says, impeded the vent of spices and other Indian commodities among the Baltic nations, by diminishing their power of purchasing.
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End of Notes

The cuneiform inscription in the Liberty Fund logo is the earliest-known written appearance of the word "freedom" (amagi), or "liberty." It is taken from a clay document written about 2300 B.C. in the Sumerian city-state of Lagash.